Dow Theory Chart 3įor example, if one index moves up to a new 52-week high, but the other index remains below that high, then the bullish breakout in the first index is deemed not as strong and susceptible to reverse.
These days investors will apply the same concept to different national stock indices like the Dow Jones (DJIA), the S&P 500 and the Nasdaq 100. Indices must confirm each otherĬharles Dow created the Dow Jones Industrial Average and the Dow Jones Transportation Average and would use these two indices to confirm each other. Once the price reverses, the general public follow the momentum and after a big move, those buying in greed at the top or selling in fear at the bottom are left ‘holding the bag’. It is always the smart money buying (accumulating) assets after a big decline, ready for the next bull market or selling (distributing) assets after a big move up ready for the next bear market. A bear market starts with a distribution phases, then a public participation phases and then a panic phase. Dow Theory chart 2Ī bull market will start with an accumulation, then move to a public participation phases and finishes with an ‘excess’ phases. The three phases are given slightly different names depending on whether it is a bull or bear market. The three phases are dictated by what the price did previously and the role of the ‘smart money’ and the general public. Minor trends last less than three weeks are the hunting grounds for day traders but considered noise by long-term investors. Secondary trends last a few weeks or perhaps months and usually counter-trend corrections, where the price moves in the opposite direction to the primary trend. They can be bull markets (price travelling up), bear markets (price trending down) or sideways ranges. Primary trends last a year or more and are the major market trends. These three types of trend are split by the length of time they occupy. This is also the philosophy of technical analysis but is the antithesis of fundamental analysis and behavioural economics.
It says that all available information is already reflected by the current price from company earnings to macro economics. This Dow theory principle has been taken from the efficient market hypothesis. These are quite self-explanatory but let’s explore each one a bit deeper before we move on to how to apply them. Trends persist until there is a clear reversal.The 6 tenets or principles that would be applied to a Dow theory portfolio are as follows:
Ideas like uptrends, downtrends, support and resistance got their start from Dow Theory. Dow also invented the Dow Jones industrial average with Edward Jones and co-founded the Wall Street Journal newspaper.Īt it’s core Dow Theory is a theory about how price trends and over one hundred years later, it forms the basis of most technical analysis used in day trading and investing today. There are six Dow Theory tenets, which were put forward by Charles Dow in a collection of editorials he wrote between 1900-1902. Contents: Dow Theoryĭow Theory is really a collection of theories about how financial markets move over time. Learn about the 6 tenets, how they work and how they can be applied to day trading. Dow Theory can be used in short-term trading as well as long-term investing.